Energy Transfer 2010 Annual Report Download - page 87

natural gas producers and other supply points and sell that natural gas to utilities, industrial consumers, other
marketers and pipeline companies, thereby generating gross margins based upon the difference between the
purchase and resale prices.
We have a risk management policy that provides for oversight over our marketing activities. These activities are
monitored independently by our risk management function and must take place within predefined limits and
authorizations. As a result of our use of derivative financial instruments that may not qualify for hedge
accounting, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from
period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports
provided to senior management and predefined limits and authorizations set forth in our risk management policy.
We inject and hold natural gas in our Bammel storage facility to take advantage of contango markets, when the
price of natural gas is higher in the future than the current spot price. We use financial derivatives to hedge the
natural gas held in connection with these arbitrage opportunities. At the inception of the hedge, we lock in a
margin by purchasing gas in the spot market or off peak season and entering a financial contract to lock in the
sale price. If we designate the related financial contract as a fair value hedge for accounting purposes, we value
the hedged natural gas inventory at current spot market prices along with the financial derivative we use to hedge
it. Changes in the spread between the forward natural gas prices designated as fair value hedges and the physical
inventory spot prices result in unrealized gains or losses until the underlying physical gas is withdrawn and the
related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled,
the previously unrealized gains or losses associated with these positions are realized. Unrealized margins
represent the unrealized gains or losses from our derivative instruments using mark-to-market accounting, with
changes in the fair value of our derivatives being recorded directly in earnings. These margins fluctuate based
upon changes in the spreads between the physical spot prices and forward natural gas prices. If the spread
narrows between the physical and financial prices, we will record unrealized gains or lower unrealized losses. If
the spread widens, we will record unrealized losses or lower unrealized gains. Typically, as we enter the winter
months, the spread converges so that we recognize in earnings the original locked in spread, either through
mark-to-market or the physical withdrawal of natural gas.
Our retail propane segment sells propane and propane-related products and services. The HOLP and Titan
customer base includes residential, commercial, industrial and agricultural customers.
In our natural gas compression business, revenue is recognized for compressor packages and technical service
jobs using the completed contract method which recognizes revenue upon completion of the job. Costs incurred
on a job are deducted at the time revenue is recognized.
Regulatory Assets and Liabilities.Our interstate transportation segment is subject to regulation by certain state
and federal authorities and has accounting policies that conform to the accounting requirements and ratemaking
practices of the regulatory authorities. The application of these accounting policies allows us to defer expenses
and revenues on the balance sheet as regulatory assets and liabilities when it is probable that those expenses and
revenues will be allowed in the ratemaking process in a period different from the period in which they would
have been reflected in the consolidated statement of operations by an unregulated company. These deferred
assets and liabilities will be reported in results of operations in the period in which the same amounts are
included in rates and recovered from or refunded to customers. Management’s assessment of the probability of
recovery or pass through of regulatory assets and liabilities will require judgment and interpretation of laws and
regulatory commission orders. If, for any reason, we cease to meet the criteria for application of regulatory
accounting treatment for all or part of our operations, the regulatory assets and liabilities related to those portions
ceasing to meet such criteria would be eliminated from the consolidated balance sheet for the period in which the
discontinuance of regulatory accounting treatment occurs.
Accounting for Derivative Instruments and Hedging Activities.We utilize various exchange-traded and
over-the-counter commodity financial instrument contracts to limit our exposure to margin fluctuations in natural
gas, NGL and propane prices. These contracts consist primarily of futures and swaps.
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